Almost all households have been affected by the rising cost of living since the start of 2022
As the UK heads towards another recession, many businesses and households didn’t expect to be bracing themselves for further economic turmoil so soon after the early pandemic crisis in April 2020. But now, with Brexit, the Cost of Living Crisis, and on-going recuperation from the economic effects of COVID-19, it looks like more financial uncertainty is around the corner.
In June 2022, UK interest rates rose from 1% to 1.25% – putting them at the highest level in 13 years – and the pound dropped to a two-year low against the dollar. Understandably, these figures are casting doubts on the immediate future of the UK’s economy.
Almost all households have been affected by the rising cost of living that has been steadily increasing since the start of 2022. And as well as putting us all out of pocket when it comes to daily spending on groceries, petrol, and heating, the impact is beginning to bite back in the broader economy too.
In April, the UK economy contracted by 0.3% as people began to cut back on their spending. Now, with petrol prices so high it costs £100 to fill an average car, it’s obvious that this is out of necessity rather than a considered move to frugality or a renewed impetus to save.
The reality is, now, that the Cost of Living Crisis is no longer just a temporary issue that will work itself out. It’s a real, impending recession that the government will have to face up to. This is further compounded by the UK’s GDP falling for the second month in a row, and stocks – as well as the pound – are slumping against global markets.
So what does a recession mean for the UK?
A recession is defined as a time when the economy contracts for two consecutive financial quarters. Recessions fundamentally are about people and businesses not having enough money to spend, or being unwilling to spend what they have. The underlying causes can include factors such as inflation running too high, a sudden shock to the economy like war – or a pandemic – and an increase in costs and outgoings. The fear that things are going to get tough can itself lead to recession too as people cut back and businesses defer investment until times are better.
For businesses, depending on the particular combination of underlying factors this means consumers are likely to have less disposable income and will cut back on non-essential purchases. It can also mean that the costs of their products and services increase, and price out their customers. As well as deferred business investment previous recessions in the UK have seen the closure of thousands of businesses, including highstreet giants like Woolworths and BHS. With so many businesses now having commitments to repay government borrowing taken on to support with Covid-19 there is likely to be an underlying precariousness for many, and the number of closures could rapidly increase, particularly in consumer-facing sectors.
The problem for businesses is real, but households can feel the squeeze of the recession the hardest. The impact on companies can lead to a higher risk of unemployment meaning an inability to pay bills or be approved for credit. The issues don’t only lead to less money for spending, but can also cause homelessness and bankruptcy, particularly where a large number of people have so little savings to fall back on.
It’s taken Britain up to five years to bounce back from previous recessions. That’s a long time to see a drop in living standards, which can in turn affect mental health and wellbeing and put further pressure on local authorities and the NHS.
What else is causing the recession?
A pandemic and a war is a hellish combination for global economies, but the UK is especially feeling the burn as Brexit continues to result in reduced economic activity and greater barriers to trade. Overriding the Northern Ireland Protocol is expected to cause significant further harm to the economy, as it could well result in the UK getting itself into a trade war as a result.
Similarly, the Cost of Living Crisis has seen real wages plunge at record rates as businesses can’t afford to raise salaries to match inflation against their overheads and other expenses. This directly leads to lower living standards, and particularly affects those workers on a lower wage.
Sadly, trying times don’t always lead to empathy. It’s been revealed that some scammers are already using the Cost of Living Crisis to target vulnerable people. 40 million people – that’s 14% higher than last year – have been contacted by scammers offering credit, rebates, and other unlikely offers in an attempt to gain personal data. Known scams include pretending to work for a bank or government authority, postal and delivery scams, and online banking scams.
Falling for a financial scam is upsetting and potentially damaging at any time, but in a recession it can make life even harder than it already is. Being aware of the scams that are happening and knowing how to keep your money safe will mean you’re less vulnerable to the kinds of people who use traumatic events for their own gain.
If you need financial support or are struggling with the effects of a potential recession, get in touch with Great Western Credit Union. We’re dedicated to supporting our community by providing ethical credit and funding to people and businesses that need it most.
You can reach our team via email or by giving us a call on 0117 924 7309.